Why most Mutual Funds perform poorly

There are a couple reasons Mutual funds perform poorly compared to the Dow or S&P 500 index.

1. Fees: The Dow 30 or S&P 500 have no fees for buying and selling, mutual finds do. Funds must buy or sell stocks as investors buy or sell the fund. This creates transaction costs.

2. Fees: Fund Managers charge fees to manage the funds.

3. Past performance. If a fund has a good year, it will most likely be touted in Money Magazine, Forbes and various other lists of Top 10 and 'Must Own' investments.

Past performance is a double edged sword. The problem comes when the fund is flooded with new money. The managers have to put that new money to work, but they might not be able to pick and chose the best stocks as they had in the past when the fund was smaller. They often end up buying the same stocks every other fund buys and that leads to mediocre performance. When new investors pile into an investment because of recent good performance it is called Chasing Return. It is usually a bad idea.

4. Benchmarks. Most funds are judged on relative performance. They are graded on how well they perform to a benchmark like the DOW30 or Russell 3000 small cap index. Their goal is to perform at least as well as the benchmark. Most aren't paid to beat the benchmark, and they aren't paid to protect your money. In fact, it could be detrimental to attempt to beat the benchmark and fail. The fund could find itself on a 'Worst Fund' list. So when the market goes up the fund goes up, and when the market goes down, they go down.

They will tell you not to worry. They will talk about investing for the long term, but the main reason they want you to stay in their funds is the Fees. Don't forget, they are paid by the amount of money they manage whether they make you money or not.

5. Investors themselves. Most investors are lousy market timers. Not only do they chase last years winners, but they buy at the top and sell at the bottom. That greatly effects the funds they invest in. When money floods in after the fund has been rising, the fund managers are forced to buy stocks at ever increasing prices. Then when the market falls investors flee in mass, forcing the fund to then sell at the bottom. The cycle repeats over and over.

We should all agree investing is a long term process, but we no longer have to pay fees for mediocre Managers to build a diversified income and investment portfolio. Investors now have far more alternatives to typical Mutual funds than just a few years ago.

I'll be getting into a few I consider to be the best.

Thank you for stopping by.